Rising yield of 10y US T-Note will be continued.

2018.10.13
10y US T-Note (generic)
Closed at 3.1613% (+0.0115%) Target to 3.5000% (+0.3387%)
Indices
S&P500 2,767.13 (+1.42%)
NASDAQ 7,486.89 (+2.29%)
2y US T-Note 2.8528% (+0.0044%)
10y Bund 0.498% (-0.021%)
10y JGB 0.150% (+0.004%)
Gold Future $1,221.6 (-0.50%)
Dollar Index 95.221 (+0.21%)

1. The ceil of 3% was pierced eventually. There are a few things we need to check in now. Firstly, let see the attacks to stock markets. Rising yields are giving pressure to high-leveraged companies which had increased their debt during period of hyper low yields. Spread between yields of T-Note and Junk - Grade is increasing. It doesn’t mean necessarily plunge of the stock markets, however. Unlike before crisis of 2008, the listed companies got enough cash, and are taking buy-back stocks or debts with it. Some companies will get hit from rising yields, almost every conglomerate, which are determining direction of the indices, will be fine with their cash. Secondly, the spread, between 2y and 10y of yields of US T-Notes, is widen to 31bp level from 20bp level. The widening could be temporary, but it means that time, to reach minus spread, still left enough. Minus spread is one of the traditional signal of plunge of stock markets. Widening spread could one of reason why I’m thinking that real plunge of the markets need more time. Thirdly, Bund is enduring the pressure very well. Unlike some analysts are expecting, Bund couldn’t preserve its yields above 60bp easily. Even though ECB is announcing the expected end of its QE, European FI market is not bad with plunging stock markets. Bunds could get the most benefit from post - US T-Notes with rising Federal Funds Rate, because ECB can’t raise their benchmark rate until at least mid-next year. Lastly, Gold is recovering its plunge. Usually, rising yields give pressure to the metal, but nowadays, it’s totally reversed. I believe that the situation happened because market participants are looking for another safe assets. The rises of yields tangled with other uncertainties is giving advantages to Bund and Gold.

2. Stock markets will start its rally again soon. In this week, global stock markets were crushed, with S&P500 -100pt at Thursday. But the time of real plunge is too early to come up. Yield spread between 2y and 10y is still in good level about 30bp. The companies struggling with their debt aren’t enough to hurt the total markets. The banks have the greatest moment, even though European banks are struggling to get out from their own problems. Earning momentum is still alive too. Yesterday, October 12, the markets got its traditional movement: reversed-relative between Stock markets and Bond markets. Rising stock markets will give pressure to FI market.

3. Inflation isn’t a big problem now. Some market participants are warning about decreasing pace of inflation. Some analysts are suggesting that real yield of 10y US T-Note is about 0.8-0.9% level with recent 2.3% CPI and It is the lowest level in history, however. They are giving justification to the additional rise. I believe the latter is right. Even if the former is right, it doesn’t matter. Whether inflation is strong enough or not, Fed will raise their benchmark rate continuously, dump their bonds in balance sheets. Job market will continue its strongest momentum. And in perspective of supply-demand, additional pressure is in the markets. US Government is issuing more debt than before, and the demand isn’t enough to cover supply. As we all know, change of tax system stop the companies to buy long-term bonds. Macroeconomic situation and demand-supply situation are enough to predict additional weakness of FI markets. Even though some reports are suggesting that US inflation is the most important factor the world economy, it’s not the biggest factor to the US FI market in now.

4. Bund could be better securities for someone who want safe assets. Recent weakening US T-Notes will be continued for a while. Every factor in the markets is suggesting rises of the yields. I suggested yield of 10Y US T-Note could touch 3.5% much faster than the market participants are expecting. As Jamie Dimon, Chairman and Chief Executive of JPMorganChase, suggested, we should prepare the probable world of 4% rate of 10Y US T-Note.

Mr. Banker, http://markety.tistory.com

 

10y US T-Note, Oct 13.pdf